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Status of Local Pension Funding Fiscal Year 2010:

An Evaluation of Ten Local Government

Employee Pension Funds in Cook County

June 25, 2012

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ACKNOWLEDGEMENTS

The Civic Federation would like to thank the staff and actuaries of the pension funds for theirfeedback and willingness to answer our pension questions.

Copyright 2012The Civic Federation

Chicago, Illinois

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TABLE OF CONTENTS

EXECUTIVE SUMMARY ......................................................................................................................................... 2STATUS OF LOCAL PENSION FUNDING OVERVIEW .................................................................................... 4

SCOPE OF REPORT...................................................................................................................................................... 4FUNDS INCLUDED IN ANALYSIS................................................................................................................................. 4PUBLIC PENSION PLAN TYPE ..................................................................................................................................... 4DATA SOURCES AND COMPARABILITY ISSUES........................................................................................................... 5RECENT PENSION REFORMS....................................................................................................................................... 6CHICAGO TRANSIT AUTHORITY PENSION REFORM LEGISLATION.............................................................................. 8

EVALUATING PENSION FUND STATUS ............................................................................................................. 9PENSION FUND STATUS INDICATORS ....................................................................................................................... 10

Funded Ratio ...................................................................................................................................................... 11Unfunded Actuarial Accrued Liabilities ............................................................................................................ 12Investment Rate of Return ........... ........... .......... ........... .......... ........... .......... .......... ........... .......... ........... .......... .... 12

CAUSES OF PENSION FUNDING STATUS CHANGE..................................................................................................... 13Sustained Investment Losses or Gains ............................................................................................................... 13Benefit Enhancements .......... ........... .......... ........... .......... ........... .......... .......... ........... .......... ........... .......... ........... 14Benefit Reductions.............................................................................................................................................. 14Changes to Actuarial Assumptions and Methods ............................................................................................... 15Employer and Employee Contributions ............. .......... ........... .......... ........... .......... ........... .......... .......... ........... .. 16

LOCAL PENSION FUND STATUS INDICATORS ............................................................................................. 17FUNDED RATIOS ...................................................................................................................................................... 18

Actuarial Value of Assets ................. ........... .......... ........... .......... ........... .......... ........... .......... ........... .......... ......... 18Market Value of Assets ......... ........... .......... ........... .......... ........... .......... .......... ........... .......... ........... .......... ........... 19

UNFUNDED ACTUARIAL ACCRUED LIABILITIES ...................................................................................................... 21Unfunded Accrued Actuarial Liabilities as a Percentage of Payroll ........... .......... ........... .......... ........... .......... .. 22Unfunded Accrued Actuarial Liabilities Per Capita in Chicago .......... .......... ........... .......... ........... .......... ......... 24

INVESTMENT RATE OF RETURN ............................................................................................................................... 26LOCAL PENSION FUND AGGREGATE DATA ................................................................................................. 29

ACTIVE

EMPLOYEES AND

BENEFICIARIES

................................................................................................................ 30

ASSETS AND LIABILITIES ......................................................................................................................................... 33Liabilities for Retiree Health Insurance Benefits (Other Post Employment Benefits) ......... ........... .......... ......... 37

REVENUES ............................................................................................................................................................... 44Employee Contributions ........... .......... ........... .......... ........... .......... .......... ........... .......... ........... .......... ........... ....... 45Employer Contributions and Annual Required Contribution (ARC) ........... .......... ........... .......... ........... .......... .. 47

EXPENDITURES ........................................................................................................................................................ 57APPENDIX A: GLOSSARY .................................................................................................................................... 59APPENDIX B: REVENUE AND EXPENDITURE DATA SOURCES ................................................................ 62APPENDIX C: SOURCES FOR FY2010 ................................................................................................................ 64APPENDIX D: CTA PENSION REFORM IN PUBLIC ACT 95-0708 ................................................................ 66 APPENDIX E: PENSION REFORM IN PUBLIC ACTS 96-0889 AND 96-1495 ............................................... 67

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EXECUTIVE SUMMARY

The purpose of this report is to compile and analyze basic financial data on ten major local governmentemployee pension funds in the Chicago area.1 It explains common indicators of pension fund fiscal healthand causes for change in the health of the local funds.

The report reviews fiscal year 2010 actuarial valuation reports and financial statements of the retirement

funds for the City of Chicago (four separate fundsMunicipal, Laborers, Police and Fire), Chicago ParkDistrict, Chicago Public Schools (Teachers Fund), Cook County, Forest Preserve District of CookCounty, Metropolitan Water Reclamation District (MWRD) and the Chicago Transit Authority (CTA).Fiscal year 2010 data is the most recent audited data available for all ten pension funds.

Public Act 96-0889, enacted in April 2010, created a new tier of benefits for many public employeeshired on or after January 1, 2011, including members of the following funds analyzed in this report:Municipal, Laborers, Cook County, Forest Preserve, MWRD, Teachers and Park Funds. The Act did notchange employee or employer contributions. Over time these benefit changes will slowly reduce liabilitiesfrom what they would have been as new employees are hired and fewer members remain in the oldbenefit tier. However, Public Act 96-0889 does not guarantee the future solvency of the affected funds.Even with reduced benefits for new employees, the Laborers, Municipal, Park and County Funds areprojected to run out of assets during the years 2035, 2030, 2025 and 2038, respectively.2

Public Act 96-1495, enacted in December 2010, created a new tier of benefits for public employees whobecome members of many public safety pension funds on or after January 1, 2011, including the ChicagoPolice and Fire funds. Unlike Public Act 96-0889, Public Act 96-1495 also changed the level of employercontributions and set a schedule for the funds to reach 90% funded by the end of 2040. Prior to theenactment of Public Act 96-1495, the Fire Fund was projected to run out of assets during 2021 and thePolice Fund was projected to run out of assets during 2025.3

Highlights of the data compiled on the ten pension funds are summarized below.

Funded Ratios:4 The actuarial value funded ratio of each fund fell in FY2010.5 All ten funds now haveactuarial value funded ratios under 75%, ranging from a low of 32.4% for the Fire Fund to a high of73.8% for the Laborers Fund. The actuarial value funded ratio for the aggregate of all ten funds assetsand liabilities was 56.2% in FY2010, down from 88.0% in FY2001. Market value funded ratios wereconsiderably lower, at an aggregate ratio of 50.3% in FY2010. The lowest market value funded ratio wasthe Fire Fund at 29.9%, and the highest was the Laborers Fund at 68.9%.

Unfunded Liabilities: Between FY2001 and FY2010 the aggregate unfunded actuarial accrued liabilitiesfor the ten funds increased by $22.8 billion, rising from $4.6 billion to $27.4 billion. Unfunded liabilitiesper capita in Chicago for the ten local funds rose from $1,189 in FY2000 to $8,993 in FY2010. For thefour City of Chicago pension funds alone, FY2010 unfunded liabilities were $14.8 billion, or $5,473 percapita.

1In this report the terms pension fund and pension plan are used interchangeably.2 Illinois Commission on Government Forecasting and Accountability,Illinois Public Retirement Systems: A Reporton the Financial Condition of the Chicago, Cook County and Illinois Municipal Retirement Fund Systems of Illinois,January 2012, p. iii.3 Illinois Commission on Government Forecasting and Accountability,Illinois Public Retirement Systems: A Reporton the Financial Condition of the Chicago, Cook County and Illinois Municipal Retirement Fund Systems of Illinois,November 2010, pp. 46, 108.4 See page 10 for more information on pension fund status indicators. Also see the glossary beginning on page 59.5 Actuarial value of assets smoothes asset gains and losses over four or five years. See page 10for details.

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Investment Income and Rate of Return: The average rate of return on pension plan assets for thosefunds with a January 1 to December 31 fiscal year was 13.7% in FY2010, down from 18.6% in FY2009.The average rate of return for funds using a July 1 to June 30 fiscal year was 12.7% in FY2010, up from-20.2% in FY2009. Investment income represented approximately 56% to 86% of total FY2010 income.

Ratio of Active Employees to Beneficiaries: Between FY2001 and FY2010, the ratio of total activeemployees to beneficiaries for the ten funds combined has gradually dropped from 1.70 actives per

beneficiary to 1.23, indicating that there are fewer active employees supporting more retirees. TheLaborers, MWRD, CTA, Park District and Forest Preserve Funds all had more beneficiaries than activesin FY2010.

Assets and Liabilities: The ten pension funds had approximately $62.5 billion in combined pension andOther Post Employment Benefit (OPEB) accrued liabilities for FY2010.6 Pension liabilities totaled $60.9billion and OPEB liabilities of the funds totaled $1.6billion. The funds assets had an aggregate actuarialvalue of $35.1 billion and a market value of $31.4 billion. Total pension and OPEB liabilities of the sevengovernments reviewed in this report were $67.1 billion ($31.9 billion unfunded) as reported in theiraudited financial statements.7

Employee Contributions: For all ten funds, employee contributions totaled $697.2 million in FY2010.

Most employees contribute at rates ranging from 8.5% to 9.125% of salary.8

Employer Contributions and ARC: All funds received their statutorily required employer contributionsin FY2010. However, none of the employers contributed the full actuarially calculated annual requiredemployer contribution (ARC) in FY2010 and only two funds, the Teachers Fund and the CTA Fund,contributed more than 50% of the pension ARC.9 In the aggregate, in order to meet the pension ARC inFY2010, employers should have contributed $2.1 billion. Instead they contributed less than half thatamount, $959.1 million, falling short by approximately $1.2 billion. Employers contributed an aggregateequivalent of 12.6% of payroll to the pension funds for pension obligations, but in order to meet the ARC,they should have contributed an additional 15.2% for a total of 27.8% of payroll in FY2010.

6 This report focuses only on OPEB obligations for the employees of the sponsoring government, not the fund staff.The obligation for fund staff is typically very small compared to the obligation for government employee fundmembers.7 See page 37 for details on this liability.8 In FY2009, CTA employees paid 6.0% of salary, but this increased to 8.345% in FY2010. CTA is the onlygovernment reviewed in this report whose employees also participate in Social Security. See discussion beginningon page 46.9 See page 47 for a discussion of ARC, which is an accounting reporting requirement but not a funding requirement.However, it does represent a reasonable calculation of the amount of money the employer might contribute eachyear in order to cover costs attributable to the current year and to reduce unfunded liabilities.

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STATUS OF LOCAL PENSION FUNDING OVERVIEW

This report analyzes basic financial data on ten major local government employee pension fundsin Cook County. It is intended to provide policymakers, pension trustees, pension fund membersand taxpayers with information they need to make informed decisions regarding public employeeretirement benefits.

Scope of Report

This report presents broad trends for ten pension funds, often aggregating the results for all tenfunds. It is designed to provide an overview of trends for these funds, not to examine the specificcauses of changes in the status of individual funds. For such an analysis, readers should consulttheActuarial Valuation reports and Financial Statements of the individual funds.

Funds Included in Analysis

The City of Chicago enrolls its employees in four different pension systems:

Municipal Employees Annuity and Benefit Fund of ChicagoLaborersand Retirement Board Employees Annuity and Benefit Fund of ChicagoFiremens Annuity and Benefit Fund of Chicago Policemens Annuity and Benefit Fund of Chicago

In addition, six other local government pension funds are analyzed in this report: 10County Employees and Officers Annuity and Benefit Fund of Cook CountyForest Preserve District Employees Annuity and Benefit Fund of Cook County11 Metropolitan Water Reclamation District Retirement Fund Retirement Plan for Chicago Transit Authority Employees Public School Teachers Pension and Retirement Fund of Chicago12

Park Employees & Retirement Board Employees Annuity and Benefit Fund

13

Public Pension Plan Type

All ten public pension plans surveyed in this report are defined benefit pension plans. In theseten defined benefit pension plans, employers and/or employees annually contribute to anemployer-sponsored retirement fund that invests assets in order to cover future benefit payments.Upon retirement, the employee receives an annuity based upon a specific formula that considershis or her highest salary (usually based on an average of several years) and length of service

10The term local government is used here broadly and includes the Chicago Transit Authority, an Illinois

municipal corporation. The seven governments and ten funds analyzed in this report were created by Acts of theIllinois General Assembly.11 The funds of Cook County and the Cook County Forest Preserve District are governed by the same pension board.12Certified Teachers employed by the Chicago Board of Education participate in the Public School TeachersPension and Retirement Fund of Chicago. Most other employees of the Board of Education are enrolled in the Cityof Chicagos Municipal Employees Annuity and Benefit Fund. Approximately 16,061, or 52.3%, of MunicipalFund members considered to be active by the Fund are Board of Education employees. Chicago Public Schools,Comprehensive Annual Financial Report for the fiscal year ended June 30, 2011, p. 75. A very small number ofBoard of Education employees are enrolled in the Laborers Fund.13The fiscal year of the Park Employees and the Public School Teachers pension funds is July 1-June 30. The othereight funds use a January 1December 31 fiscal year.

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in this sense, the benefit is defined. If the amounts contributed to the plan over the term of theemployees employment, plus accrued investment earnings, are insufficient to support allbenefits (including health and survivors benefits), the formeremployer is expected to pay thedifference.

By contrast, in a defined contribution plan, the employee and/or employer contribute fixed

amounts (i.e., the contribution is defined). The retirement benefit, whether taken as a lumpsum or an annuity, is based upon the total amount contributed to the plan over the employeestenure as well as any investment return. In general, the employers liability ends upon theemployees retirement, apart from any ancillary health benefits. Common examples of definedcontribution plans are 401(k), 403(b) and 457 plans. These designations refer to the governingsections of the federal tax code. Some public employee funds in the United States are nowhybrid plans, offering some features of both defined benefit and defined contribution plans toemployees.14 Some of the governments in this report may also make supplementary 457 plansavailable to their employees, but those plans are not included in this analysis.

Of the ten funds covered in this analysis, only the participants in the Chicago Transit Authority(CTA) pension fund also participate in the federal Social Security program. CTA retirees areeligible for Social Security benefits in addition to their CTA pension benefits.15 The CTA and itsemployees each pay an additional 6.2% of the employees Social Security taxable salary to theSocial Security Administration.

Data Sources and Comparability Issues

Unless otherwise noted, all fund data in this report is taken from the actuarial valuations andfinancial statements of the funds, as listed in Appendix C on page 64. Specific page numberreferences for revenues and expenditures are listed in Appendix B on page 62. For those plansthat also subsidize retiree healthcare, combined pension and healthcare results are reported.

Some funds compute their actuarial results in one way to satisfy State reporting requirements andin a second way to comply with the standards of the Governmental Accounting Standards Board(GASB). In order to maximize comparability among the funds, the Civic Federation uses thefigures computed according to GASB standards with three notable exceptions:

1. The TeachersFund figures shown in this report are from the Combined actuarialvaluation, which includes assets and expenses related to the retiree healthcare obligations ofthe fund but does not include healthcare as a long-term liability. State statute (40 ILCS 5/17-142.1) currently limits the funds annual reimbursements to retirees for their healthcareexpenditures to $65 million, so the fund considers this a fixed annual expenditure rather thanan open-ended liability. However, GASB requires that the retiree healthcare plan be valued

as an ongoing liability because there is a history of increases to this statutory maximum.16

14For example, see What are the Rhode Island Pension Reforms?http://www.civicfed.org/iifs/blog. CivicFederation, April 19, 2012.15 The majority of all government employers and employees hired after March 31, 1986 each pay Medicare payrolltaxes of 1.45%. See Internal Revenue Service Publication 963 athttp://www.irs.gov/pub/irs-pdf/p963.pdffor furtherinformation.16Public School Teachers Pension and Retirement Fund of Chicago,Actuarial Valuation of Retiree HealthInsurance Plan as of June 30, 2010 for GASB Statement No. 43, p. 83.

http://www.civicfed.org/iifs/bloghttp://www.civicfed.org/iifs/bloghttp://www.civicfed.org/iifs/bloghttp://www.irs.gov/pub/irs-pdf/p963.pdfhttp://www.irs.gov/pub/irs-pdf/p963.pdfhttp://www.irs.gov/pub/irs-pdf/p963.pdfhttp://www.irs.gov/pub/irs-pdf/p963.pdfhttp://www.civicfed.org/iifs/blog

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2. The Cook County Fund figures shown in this report are from the Combined actuarialvaluation required by State law, which values pension and OPEB liabilities using a 7.5%discount rate rather than a lower discount rate of 4.5% for OPEB liabilities as required forGASB reporting. Cook County government does not directly subsidize OPEB. OPEB isprovided entirely by the pension fund (see page 37). The pension fund pays pension andOPEB benefits from the same asset pool.

3.

The Forest Preserve Fund figures shown in this report are from the Combined actuarialvaluation required by State law, which values pension and OPEB liabilities using a 7.5%discount rate rather than a lower discount rate of 4.5% for OPEB liabilities as required forGASB reporting. The Forest Preserve District does not directly subsidize OPEB. OPEB isprovided entirely by the pension fund (see page 37). The pension fund pays pension andOPEB benefits from the same asset pool.

The sum of the pension and OPEB liabilities reported according to GASB standards is higherthan the total liabilities reported in the Combined valuations of Teachers, Cook County andForest Preserve Funds required pursuant to Illinois statute. The reported FY2010 OPEBliabilities according to GASB standards are $2.9 billion higher for the Teachers Fund, $605.7million higher for the Cook County Fund and $13.6 million higher for the Forest Preserve Fund.A total actuarial value funded ratio for pension and OPEB liabilities calculated using GASBstandards is therefore lower for each fund. In the Combined valuations, the FY2010 ratios are67.1% for the Teachers Fund, 60.7% for the Cook County Fund and 65.2% for the ForestPreserve Fund.17 Using the GASB-reported liabilities those ratios fall to 57.1%, 58.1% and62.2%, respectively.18

It is also important to note that the Civic Federation reports the combined pension and retireehealthcare liabilities for the Retirement Plan for CTA employees in prior years when the planfunded those benefits. Public Act 95-708 removed the liability for retiree healthcare benefitsfrom the CTA pension fund and FY2009 was the first year that CTA pension fund data did notinclude healthcare liabilities.

Recent Pension Reforms

Second Tier of Benefits for New Hires as of January 1, 2011: Public Acts 96-0889 and 96-1495

Public Act 96-0889 creates a new tier of benefits for public employees who become members ofmany public pension plans on or after January 1, 2011.19 The Act affects new members of thefollowing funds analyzed in this report: Municipal, Laborers, Cook County, Forest Preserve,MWRD, Teachers and Park Funds. Current benefit provisions differ among the funds. In

17Chicago Teachers Pension Fund, 115th Comprehensive Annual Financial Report for the year ended June 30,2010; County Employees Annuity and Benefit Fund of Cook County, Actuarial Valuation as of December 31,2010; and Forest Preserve District Employees Annuity and Benefit Fund of Cook County, Actuarial Valuation as ofDecember 31, 2010.18 GASB-based actuarial value funded ratios are calculated by the Civic Federation by dividing the total reportedactuarial value of assets by the sum of GASB 25 and GASB 43 reported liabilities. It should be noted that theseGASB standards are reporting, not funding requirements. However, they provide a useful basis of comparisonbetween funds. The Cook County and Forest Preserve Funds prefer the Combined valuation used throughout mostof this report for evaluation of funding status.19A trailer bill to correct technical problems with Public Act 96-0889 was enacted in December 2010 as PublicAct 96-1490.

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general, for many funds the major benefit changes are an increase in full retirement age from 60to 67 and early retirement age from 55 to 62, reduction of final average salary from the highest 4year average to the highest 8 year average, a $106,800 cap on pensionable earnings, and thereduction of the automatic cost of living adjustment from 3% compounded to the lesser of 3% orone half of the increase in Consumer Price Index simple interest. Over time these benefit changeswill slowly reduce liabilities from what they would have been as new employees are hired and

fewer members remain in the old benefit tier. However, Public Act 96-0889 does not guaranteethe future solvency of the affected funds. Even with reduced benefits for new employees, theLaborers, Municipal, Park and County Funds are projected to run out of assets during the years2035, 2030, 2025 and 2038, respectively.20

Public Act 96-0889 does not change employer or employee contribution rates, with thesignificant exception of a partial employer contribution holiday granted to Chicago PublicSchools (CPS). The Act reduces CPS required employer pension contribution for FY2011,FY2012 and FY2013 to an amount estimated to be equivalent to the employers normal cost,thereby revising the funding standards set in Public Act 89-0015.21 It also delays the year thatthe Teachers pension fund must reach a 90% funded ratio from 2045 to 2060. Prior to thepassage of Public Act 96-0889, the CPS required contribution for FY2011 was calculated to be$586.9 million, or almost double the FY2010 amount. Public Act 96-0889 reduced the Districtsrequired FY2011 contribution to $187.0 million, which is $120.5 million, or 39.2% less than theprior year contribution.22 In FY2014, the year when the reduced payment provision sunsets, theDistricts pension payment is projected to increase to $647.8 million, an increase of $451.8million over the currently projected FY2013 pension contribution.23

Public Act 96-1495 creates a new tier of benefits for public employees who become members ofmany public safety pension funds on or after January 1, 2011. The Act affects new members ofthe Chicago Police and Chicago Fire Funds. In general, the major benefit changes are as follows:an increase in full retirement age from 50 to 55; reduction of final average salary from thehighest 4-year average to the highest 8-year average; a $106,800 cap on pensionable earnings;and change in the automatic cost of living adjustment from 1.5% simple interest to the lesser of3% or one half of the increase in Consumer Price Index simple interest. Over time these benefitchanges will slowly reduce liabilities from what they would have been as new employees arehired and fewer members remain in the old benefit tier.

Public Act 96-1495 also changes employer contributions. The change for the City of Chicagowill be significant. The Citys contribution is currently a fixed multiple of the employeecontributions made two years prior: a multiple of 2.26 for the Fire Fund and 2.00 for the Police

20 Illinois Commission on Government Forecasting and Accountability,Illinois Public Retirement Systems: A Reporton the Financial Condition of the Chicago, Cook County and Illinois Municipal Retirement Fund Systems of Illinois,

January 2012, p. iii.21Normal cost is an actuarially-calculated amount representing that portion of the present value of pension planbenefits which is allocated to a given valuation year.22 Actuarial projection by Goldstein & Associates for Kevin Huber, Executive Director of the Public SchoolTeachers Pension and Retirement Fund of Chicago, March 31, 2010. See also Illinois Commission on GovernmentForecasting and Accountability,Illinois Public Retirement Systems: A Report on the Financial Condition of theChicago, Cook County and Illinois Municipal Retirement Fund Systems of Illinois, November 2010, p.119.23Chicago Teachers Pension Fund, 115th Comprehensive Annual Financial Report for the year ended June 30,2010, p. 16. See also Illinois Commission on Government Forecasting and Accountability,Illinois PublicRetirement Systems: A Report on the Financial Condition of the Chicago, Cook County and Illinois Municipal

Retirement Fund Systems of Illinois, February 2012, p. 121.

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Fund (see page 48of this report). These multiples have provided much less funding than theamount needed to adequately fund the plans for at least the last ten years (see page 47). PublicAct 96-1495 requires the City in 2015 to begin making contributions sufficient to bring thefunded ratio of the Police Fund and the Fire Fund to 90% by the end of 2040, using a levelpercentage of payroll and projected unit credit actuarial valuation method. If the City fails tomake its required contributions, the Illinois Comptroller will withhold State fund transfers to the

City. Prior to the enactment of Public Act 96-1495, the Fire Fund was projected to run out ofassets during 2021 and the Police Fund was projected to run out of assets during 2025.24

See Appendix E for more on these pension reform Acts.

Chicago Transit Authority Pension Reform Legislation

Major reforms of the Chicago Transit Authority (CTA) pension plan passed by the IllinoisGeneral Assembly had a significant effect on the CTA pension fund beginning in FY2007. Thereforms are described here in order to give the reader context with which to understand the statusof the CTA pension plan as described in this report.

The urgency for reform of the CTA pension fund arose from the actuarial projection that the fundwould be unable to pay retiree healthcare costs by 2008 and would reach 0% funding by 2013 ifnothing was done to boost assets or reduce liabilities. The funds poor financial health wasprimarily the result of insufficient employer and employee contributions, early retirementprograms, benefit increases and dramatic increases in the cost of healthcare over the past fewdecades.25 The legislated reforms specifically addressed each of these issues.

Passed in the spring of 2006 as part of the FY2007 Budget Implementation Act, Public Act 94-0839 required that beginning January 1, 2009, the CTA and its employees make annual pensioncontributions sufficient to bring the funded ratio to 90% by the end of 2058. The Act specifiedthat payments are to be made as a level percentage of payroll and that post-employment

healthcare benefits provided by the pension fund were to be excluded from the actuarialcalculations used to determine required contributions. The 50-year schedule and 90% fundingtarget are similar to the funding plan for the State of Illinois five retirement systems.26

The second piece of CTA pension reform legislation, Public Act 95-0708, was passed onJanuary 18, 2008 and made changes to pension and retiree healthcare contributions andbenefits.27 More specifically, employee and employer contributions were increased to 6% and12% of payroll, respectively, which doubled their previous contribution rates of 3% and 6%. Theemployer, however, will receive a credit for pension obligation bond debt service payments ofup to 6% of payroll.

24 Illinois Commission on Government Forecasting and Accountability,Illinois Public Retirement Systems: A Reporton the Financial Condition of the Chicago, Cook County and Illinois Municipal Retirement Fund Systems of Illinois,November 2010, pp. 46 and 108.25 Retirement Plan for Chicago Transit Authority EmployeesBasic Financial Statements and ManagementsDiscussion and Analysis for the year ended December 31, 2006, p. 6.26See Civic Federation, The State of Illinois Retirement Systems: Funding History and Reform Proposals,(October 26, 2006). http://www.civicfed.org/articles/civicfed_220.pdf27 See page 41 for more details.

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In addition to the baseline 6% employee and 12% employer contributions, the legislation also setfunded ratio standards. If these standards are not met, additional employer and employeecontributions are triggered. Public Act 95-0708 adjusted the 50-year schedule forward one yearto 2059, requiring that the fund maintain a minimum 60% funded ratio through FY2039. If thefund falls below this requirement, then the combined contribution is increased with the employerpaying two-thirds of the increased contribution and employees covering the remaining one-third

of the increased contribution. The same two-third/one-third increased contribution standardapplies to a second requirement, which states that beginning in FY2040 the fund must maintain acontribution schedule that is sufficient to bring total assets of the plan to 90% by FY2059. Goingforward from FY2060, the fund must receive a minimum contribution amount needed tomaintain the funded ratio at or above 90%.

The legislation changed benefits for CTA employees hired after January 18, 2008, raising theyears-of-service requirement for the reduced pension benefit available at 55 years of age from 3years to 10 years of service. The legislation also raised the age requirement for receiving anunreduced pension from 55 years of age to 64 years of age with 25 years of service.

Public Act 95-0708 required that no less than $1,110,500,000 in pension obligation bondproceeds be deposited into the retirement fund and no less than $528,800,000 be deposited into anew Retiree Health Care Trust. The infusion of $1.1 billion into the retirement fund wasexpected to raise its funded ratio to approximately 80%.28

The effects of these two pieces of legislation were first realized in the FY2007 pension financialstatements. As a result of legislation that created the separate Retiree Health Care Trust,healthcare liabilities for the pension fund decreased from $1.766 billion as of January 1, 2007 to$68.8 million as of January 1, 2008.29 The CTA and the CTA pension fund have no furtherobligations regarding retiree health insurance. The Chicago Transit Authority Retiree HealthCare Trust reported total present value of projected benefits of $693.5 million for FY2010 andtotal income and assets of $737.9 million, for a 106.4% coverage ratio.30

The CTA Fund actuaries adjusted the retirement probability assumptions due to the changes inretirement eligibility age, required years of service and healthcare eligibility that took effectJanuary 18, 2008. These assumption changes reduced the FY2007 actuarial liabilities by $28.0million.31

FY2008 audited CTA pension data reflected the infusion of $1.1 billion in bond proceeds, nearlydoubling its total actuarial value of assets. This cash infusion raised the CTAs pension fundedratio from 38.0% in FY2007 to 75.6% in FY2008.

EVALUATING PENSION FUND STATUSThe following section describes the primary indicators of pension fund health used in this report.

28 Retirement Plan for CTA Employees,Actuarial Valuation as of January 1, 2008, p. 3.29 Retirement Plan for CTA Employees,Actuarial Valuation as of January 1, 2008, p. 16.30 Chicago Transit Authority Retiree Health Care Trust, Funding Results as of January 1, 2011, p. 3.31 Retirement Plan for CTA Employees,Actuarial Valuation as of January 1, 2008, p. 4.

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Pension Fund Status Indicators

Pension fund status indicators show how well a pension fund is meeting its goal of accruingsufficient assets to cover its liabilities. Ideally, a pension fund should hold exactly enough assetsto cover all of its actuarial accrued liabilities. Actuarial accrued liabilities represent liabilities forfuture benefit payments due to current beneficiaries, as well as liabilities for benefits earned todate by current employees. A pension fund is considered 100% funded when its asset level

equals the actuarial accrued liabilities. A funding level under 100% means that a funds currentassets are less than the amount needed to meet all accrued liabilities.

Assets and liabilities are calculated using a number of actuarial assumptions. Liabilities arecalculated using assumptions about such factors as future salary increases, retirement age and lifeexpectancy. Assets can be reported by their current market value, which recognizes unrealizedgains and losses immediately in the current year. This measure is subject to significant marketvolatility. Under Government Accounting Standards Board (GASB) Statement No. 25, assets ofpublic pension plans may also be reported based on their smoothed market value, whichmitigates the effects of short-term market volatility by recognizing each years investment gainsor losses over a period of three to five years.32 For example, one smoothing technique recognizes

20% of the difference between the expected (based on the assumed rate of return) and actualinvestment returns for each of the previous five years. GASB 25 allows for the actuarial valueto either be smoothed or equal to the current market value. In 2009 Public Act 96-0043required the five State of Illinois retirement systems to switch from using current market value astheir actuarial value to using a smoothed market value as their actuarial value, as do all ten localfunds reviewed in this report. Public Act 96-1495 requires all the public safety pension funds itaffects to reset their actuarial value at the market value as of March 30, 2011 and then to proceedwith five-year asset smoothing from that time forward.

It is important to consider two critical factors when evaluating the status of pension funds. First,the status of a pension fund is in large part a function of the actuarial methods and

assumptions made. Changes to assumptions based on demographic trends, plan experiences orthe selection of a different actuarial method can produce substantially different pictures of afunds status.

Second, because pension financing is long-term in nature, pension fund status is best evaluatedby examining multi-year trends, rather than a single year in isolation. Negative multi-yeartrends are cause for concern and indicate a need for a change in funding strategy or benefitlevels. A given indicator that is low, but has been stable for several years, may occasion a lesserdegree of alarm than a once-healthy fund that has experienced precipitous decline in recentyears.

32 In November 1994, the Government Accounting Standards Board (GASB) issued Statement No. 25 thatestablished new standards for the reporting of a pension funds assets. The requirement became effective June 15,1996. Up until that statement, most pension funds used two measurements for determining the net worth of assets,book value (recognizing investments at initial cost or amortized cost) and market value (recognizing investments atcurrent value). In Statement No. 25, GASB recommends a smoothed market value, also referred to as the actuarialvalue of assets, in calculations for reporting pension costs and actuarial liabilities. The smoothed market value oractuarial value of assets accounts for assets at market values by recognizing unexpected gains or losses over a periodof 3 to 5 years. GASB is currently considering revising its standards such that pension assets would be valued atmarket value for reporting purposes. http://www.gasb.org/

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The three common indicators used in this report are funded ratio, unfunded liabilities and actualinvestment rate of return and are described below.

Funded Ratio

The most basic indicator of pension fund status is its ratio of assets to liabilities, or fundedratio. Usually this ratio is expressed in terms of the actuarial value of assets, as required byGASB Statement 25. When a pension fund has enough assets to cover all its accrued liabilities, itis considered 100% funded. This does not mean that further contributions are no longer required,but rather that the plan is funded at the appropriate level on the date of valuation. A funding levelunder 100% means that a fund does not have sufficient assets on the date of valuation to cover itsactuarial accrued liability.

The optimum situation for any pension fund is to be fully funded, with 100% of accruedliabilities covered by assets. There is no official industry standard or best practice for anacceptable funded ratio other than 100%. The Pension Protection Act of 2006 changed thefederal laws that govern private sector pension funds, requiring private plans to meet a 100%funding target, up from 90% previously required under the Employee Retirement Income

Security Act (ERISA). Private sector pension plans that are less than 100% funded mustamortize, or pay off, their unfunded liability over seven years. Private sector pension plans thatare less than 80% funded are considered at-risk, and must make additional contributions toboost their funded ratio.33

Some people claim that there is no real need for governments to achieve 100% funding. Theyargue that governments, unlike private corporations, are not at risk of dissolving and, therefore,can meet their obligations in perpetuity. However, public pensions should be funded sufficientlyto prevent the growth of the unfunded liability. If the unfunded liability is growing and the planhas no practical strategy for reducing it, this is cause for serious concern.

The Illinois General Assembly has set 90% as a target funded ratio for state pension funds,stating, 90% is now the generally-recognized norm throughout the nation for public employeeretirement systems that are considered to be financially secure and funded in an appropriate andresponsible manner (40 ILCS 5/1-103.3). Similarly, additional employer contributions arerequired for the Chicago Teachers Fund when the ratio falls below 90% (40 ILCS 5/17-127ff).State statutes now require that the CTA pension fund maintain a minimum 60% funded ratiothrough 2039 and reach 90% funded by 2059 as part of recent pension reform legislation (40ILCS 5/22-101e3-4). The statute requires that the CTA Fund receive sufficient employer andemployee contributions to stay above 90% funded after 2059. Public Act 96-1495 will also

33 See the Pension Protection Act of 2006, Public Law 109-280,http://frwebgate.access.gpo.gov/cgi-bin/getdoc.cgi?dbname=109_cong_public_laws&docid=f:publ280.109.pdf. See also Deloitte, SecuringRetirement: An Overview of the Pension Protection Act of 2006, (August 3, 2006).http://www.hreonline.com/pdfs/01012007Extra_Pension_SecuringRetirement.pdf. The Worker, Retiree andEmployer Recovery Act signed into law by President Bush on December 23, 2008 loosened some of theserequirements by, for example, extending from 10 to 13 the number of years an endangered (less than 80% funded)plan is given to implement an improvement strategy. See the Worker, Retiree, and Employer Recovery Act of 2008,HR 7327, Public Law 110-458,http://frwebgate.access.gpo.gov/cgi-bin/getdoc.cgi?dbname=110_cong_bills&docid=f:h7327enr.txt.pdf.

http://frwebgate.access.gpo.gov/cgi-bin/getdoc.cgi?dbname=109_cong_public_laws&docid=f:publ280.109.pdfhttp://frwebgate.access.gpo.gov/cgi-bin/getdoc.cgi?dbname=109_cong_public_laws&docid=f:publ280.109.pdfhttp://frwebgate.access.gpo.gov/cgi-bin/getdoc.cgi?dbname=109_cong_public_laws&docid=f:publ280.109.pdfhttp://frwebgate.access.gpo.gov/cgi-bin/getdoc.cgi?dbname=109_cong_public_laws&docid=f:publ280.109.pdfhttp://www.hreonline.com/pdfs/01012007Extra_Pension_SecuringRetirement.pdfhttp://www.hreonline.com/pdfs/01012007Extra_Pension_SecuringRetirement.pdfhttp://frwebgate.access.gpo.gov/cgi-bin/getdoc.cgi?dbname=110_cong_bills&docid=f:h7327enr.txt.pdfhttp://frwebgate.access.gpo.gov/cgi-bin/getdoc.cgi?dbname=110_cong_bills&docid=f:h7327enr.txt.pdfhttp://frwebgate.access.gpo.gov/cgi-bin/getdoc.cgi?dbname=110_cong_bills&docid=f:h7327enr.txt.pdfhttp://frwebgate.access.gpo.gov/cgi-bin/getdoc.cgi?dbname=110_cong_bills&docid=f:h7327enr.txt.pdfhttp://frwebgate.access.gpo.gov/cgi-bin/getdoc.cgi?dbname=110_cong_bills&docid=f:h7327enr.txt.pdfhttp://frwebgate.access.gpo.gov/cgi-bin/getdoc.cgi?dbname=110_cong_bills&docid=f:h7327enr.txt.pdfhttp://www.hreonline.com/pdfs/01012007Extra_Pension_SecuringRetirement.pdfhttp://frwebgate.access.gpo.gov/cgi-bin/getdoc.cgi?dbname=109_cong_public_laws&docid=f:publ280.109.pdfhttp://frwebgate.access.gpo.gov/cgi-bin/getdoc.cgi?dbname=109_cong_public_laws&docid=f:publ280.109.pdf

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require most public safety pension funds in Illinois to make contributions sufficient to reach 90%funded by 2041, although not all public safety pension funds will be held to such a target.34

Unfunded Actuarial Accrued Liabilities

Unfunded actuarial accrued liabilities (UAAL) are those accrued liabilities not covered byactuarial assets. Unfunded liability is calculated by subtracting the actuarial value of assets fromthe actuarial accrued liability of a fund.

One of the functions of this indicator is to measure a funds ability to bring assets in line withliabilities. Healthy funds are ones that are able to reduce their unfunded liabilities over time;substantial and sustained increases in unfunded liabilities are cause for concern.

It can be useful to measure an unfunded liability as a percentage of payroll covered by the plan(see page 22 of this report). This measurement expresses the unfunded liability in terms ofcurrent personnel expenditures and demonstrates the relative size of the unfunded liability. Oneof the functions of this indicator is to measure a funds ability to manage or make progress inreducing its unfunded liability. A gradual decrease in the unfunded liability as a percent of

covered payroll over time would indicate that a reasonable funding strategy is being pursued. Ifthe unfunded liability continues to increase as a percentage of covered payroll, then a newfunding strategy and a reduction in the level of benefits granted by the fund may need to beconsidered.

Investment Rate of Return

A pension fund invests the contributions of employers and employees in order to generateadditional revenue over an extended period of time. Investment income provides the majority ofrevenue for an employees pension over the course ofa typical career. The funds actuarialassumptions should be aligned with its investment policies in order to achieve appropriate risk

and yield levels for the plans portfolio. Funds investment policies are validated by achievingtheir annualized risk adjusted rate of return on investments over time. The funds are required toreport their assets at fair market value so investment income includes unrealized appreciation ordepreciation over the time periods reflected. Because of this, investment income can show largefluctuations from year to year. Low or negative investment income usually causes a significantdrop in pension fund assets, although this effect may be smoothed over time depending on theactuarial method of calculating assets.

Most of the local funds reviewed in this report assume an 8% average annual rate of return ontheir pension investments for actuarial purposes (see page 38). The assumed rate of returnutilized by funds, normally close to 8%, is compared to the actual annualized rate of return

earned by the funds over time (usually 10 years). Four of the five State of Illinois pension funds

34 A funded ratio based on a smoothed actuarial value of assets does not represent the percentage of liabilities thatcould be covered by assets if those assets were sold at their current market value. For example, the Chicago FireFund had an FY2010 funded ratio of 32.4% based on the actuarial value of assets, but a funded ratio of 29.9% basedon the market value of assets. In other words, the FY2010 market value of assets was equal to only 29.9% ofactuarial accrued liabilities. During a period of substantial investment gains or losses, a smoothed actuarial fundedratio does not reflect the true level of assets held by the fund.

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reduced their expected rates of return in 2011.35 Rates of return for similarly structured pensionfunds can also be compared to each other over time or to specific market indices andbenchmarks.

The assumed investment rate of return plays an important role in the calculation of actuarialliabilities. It is used to discount the present value of projected future benefit payments.36 The

discount rate has an inverse relationship to actuarial liabilities, such that a higher discount ratewill result in lower liabilities. A higher assumed rate of return may be desirable because itminimizes liabilities, but it should remain realistic. The CTA pension funds actuaries warned inyears past that the 9.0% assumed rate of return negotiated in collective bargaining was on theverge of being indefensibly high. As of January 1, 2011 the CTAs discount rate was reduced to8.5% in response to a call for more reasonable actuarial valuation assumptions.37

The appropriate discount rate to use for public pension funds has been a subject of considerabledebate in recent years. The Governmental Accounting Standards Board is expected topromulgate new pension accounting standards in the near future that will require a blendeddiscount rate for financial reporting that will likely be lower than the rate currently used by mostfunds, increasing reported liabilities.38

Causes of Pension Funding Status Change

The following are four major factors that influence a pension plans funding status.

Sustained Investment Losses or Gains

When rates of return are positive, investment income usually represents the majority of a fundstotal income for a mature pension plan that has been in existence for a while. Employee andemployer contribution amounts are relatively stable from year to year but investment income canfluctuate widely. Multi-year investment gains or losses that deviate substantially from the

assumed rate of return have a major impact on fund assets.

The strong investment market of the late 1990s produced several years of significant gains forpension funds. Likewise, the market decline of 2000-2002 created significant losses for the fundsand the steep decline in equity markets beginning in 2008 resulted in negative returns for all tenfunds analyzed in this report. The funds with January 1 to December 31 fiscal years allexperienced positive returns for 2009, and all ten funds experienced positive returns for 2010.The effects of these gains and losses are felt for several years beyond their market occurrencedue to the actuarial smoothing of assets. While most FY2007 financial statements no longerreflected the market decline felt at the beginning of the decade, this respite was brief given thedramatic investment losses of FY2008.

35See State Pension Liabilities Rise Due to Lower Expected Investment Returns,http://www.civicfed.org/iifs/blog. Civic Federation, November 5, 2010. The rate of return for the State EmployeesRetirement System and the State Universities Retirement System of Illinois was reduced to 7.75% from 8.5%. Therate of return was reduced to 7.0% from 8.0% for the Judges Retirement System and the General AssemblyRetirement System.36The investment rate of return is also used to calculate the smoothed value of assets (see page 10).37See IL P.A. 94-839 and Retirement Plan for CTA Employees,Actuarial Valuation as of January 1, 2011, p. 2.38 Read about post-employment benefit accounting and financial reporting atwww.gasb.org.

http://www.civicfed.org/iifs/bloghttp://www.civicfed.org/iifs/bloghttp://www.gasb.org/http://www.gasb.org/http://www.gasb.org/http://www.gasb.org/http://www.civicfed.org/iifs/blog

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Benefit Enhancements

Enhancements to retirement benefits can take various forms, such as an increase in the annuityformula, reduction in total years of service required for maximum annuity or a reduction inretirement age for maximum annuity. Specific early retirement initiatives designed to encourageolder employees to retire early can also be considered benefit enhancements, although they aretypically available only for a limited time and sometimes require additional employer or

employee contributions.

Benefit enhancements increase the promised payments that will be made to beneficiaries eitherin the form of pension annuities or other post retirement benefits and therefore increase a pensionfunds liabilities. Sometimes those enhancements are granted in exchange for short-termemployee concessions on salaries or health insurance. Offering benefit enhancements may be anattractive option to employers, since achieving immediate short-term savings on other employeecosts often appears to be a more pressing need than controlling longer-term pension liabilities.Benefit enhancements are part of the overall economic package offered by employers toemployees and may be negotiated either inside the scope of collective bargaining or outside of it.

For all of the funds analyzed in this report, plan changes that may or may not have beennegotiated by labor and management must also be passed by the Illinois General Assembly andcodified in state statute.39 Labor and management are also free to lobby the General Assemblyfor changes independently.

For example, Public Act 94-0719, effective January 1, 2005, doubled the automatic annual costof living increase for Chicago Police retirees born between 1950 and 1954 from 1.5% to 3.0%.Fund actuaries estimate that this change increased the plans actuarial liability by $139.6 millionin FY2005.40 Retroactive pay increases also affect pension costs because higher salaries generatehigher annuities. For example, retroactive pay increases awarded to Chicago firefighters createdan actuarial loss of $105.5 million in FY2006.41

Benefit Reductions

The Constitution of the State of Illinois states that once granted, pension benefit enhancementsmay not be diminished.42 The Civic Committee of the Commercial Club suggests that the IllinoisConstitution protects the rights of pension benefits that have already been earned by publicemployees but does not protect benefits that have not yet been earned. The Civic Committeerecommends that a second-tier defined benefit pension plan may be applied to both newemployees and current employees prospectively.43

39 For the CTA, pension plan changes were made exclusively through the collective bargaining process until the

passage of Public Act 95-0708 that codified CTA pension benefits in state statute.40Policemens Annuity and Benefit Fund of Chicago,Actuarial Valuation Report for the year ending December 31,2005 , pp. 9 and 15.41Firemens Annuity and Benefit Fund of Chicago, Actuarial Valuation Report for the year ending December 31,2006, p. 7.42 In Illinois, as in many states, pension benefits granted to public employees are guaranteed by the StateConstitution. Constitution of the State of Illinois, Article XIII Section 5.43 Civic Committee of the Commercial Club, Minority Report to the State Pension Modernization Task Force,November 2009. Seehttp://www.ilga.gov/commission/cgfa2006/Upload/112009PensionTaskForceReport.pdf, p. 57(last visited February 18, 2010). This idea was considered but not approved in the 2011 spring and fall veto sessionsof the Illinois General Assembly.

http://www.ilga.gov/commission/cgfa2006/Upload/112009PensionTaskForceReport.pdfhttp://www.ilga.gov/commission/cgfa2006/Upload/112009PensionTaskForceReport.pdfhttp://www.ilga.gov/commission/cgfa2006/Upload/112009PensionTaskForceReport.pdfhttp://www.ilga.gov/commission/cgfa2006/Upload/112009PensionTaskForceReport.pdf

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In April 2012, Illinois Governor Pat Quinn proposed a pension reform framework for the fiveState pension systems in which employees are given a choice between two pension options,thereby avoiding the issue of unconstitutionally imposing pension reforms on current employees.Pension participants hired before January 1, 2011 would continue to receive subsidized retireehealthcare as a consideration for choosing a lower level of pension benefits. Employees who do

not choose the new benefit level would have their pensionable salary frozen and receive nohealthcare subsidy after retirement, but keep their other pension benefit provisions.44

Even vested pension benefits may be placed in jeopardy if a municipality files for bankruptcy. Atthe point when a municipality receives approval to enter into a bankruptcy proceeding,employees and retirees become creditors of the municipality. Employees and retirees mayreceive unsecured creditor status during this process, which may limit their ability to fullyrecover salary and benefit amounts previously agreed to or conferred upon them. While not anintentional or agreed-upon reduction of benefits, the reality of this situation may be a reductionof pension benefits for municipal employees and retirees.

Changes to Actuarial Assumptions and MethodsActuarial assumptions and methods can change for various reasons, including demographictrends, analysis of recent plan experiences or new industry standards such as GASBrequirements. It is considered standard practice for actuaries to review and reassess assumptions,such as mortality rates and salary levels, every five years. There are a number of acceptablemethods for computing a plans assets, liabilities and funding requirements. It is important torecognize that change from one method to another can produce a significant change in a fundsassets, liabilities or funding requirements.

For example, in FY2004 the Cook County and Cook County Forest Preserve District pensionplans changed actuaries. The new actuary used a different method for smoothing asset values

than did the previous actuary.45 The new actuary also analyzed the fund experience from 2000-2003 and subsequently made two significant assumption changes: (1) the discount rateassumption was changed from 8.0% to 7.5% per year; and (2) the salary increase assumption waschanged from 5.5% to 5.0% per year.46 The fund actuary estimated that using the old methodsand assumptions, the Cook County FY2004 funded ratio would have been 69.5% rather than70.9%. Similarly, the Forest Preserve FY2004 funded ratio would have been 73.1% rather than76.0%.47

In FY2005 the Cook County and Forest Preserve plans actuary changed the methods used tocalculate actuarial liabilities in order to more accurately model the liabilities of the Funds. These

44A bill similar to the Governors framework was considered by the General Assembly during the 2012 springlegislative session as amendments to Senate Bill 1673, but was not passed before adjournment on May 31, 2012.45 The previous actuary used a 5-year smoothed average ratio of market to book value while the new actuary used a5-year smoothing of unexpected investment gains or losses (market value only), a more common method. CountyEmployees and Officers Annuity and Benefit Fund of Cook County,Actuarial Valuation as of December 31, 2003,p. 69 and County Employees and Officers Annuity and Benefit Fund of Cook County,Actuarial Valuation as ofDecember 31, 2004, pp. 7-8.46County Employees and Officers Annuity and Benefit Fund of Cook County,Actuarial Valuation as ofDecember 31, 2004, p. 10.47 Estimates provided by Sandor Goldstein via e-mail to the Civic Federation, January 24, 2008.

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changes resulted in a decrease of $729.6 million in unfunded liabilities for Cook County and adecrease of $34.4 million in unfunded liabilities for the Forest Preserve.48 Without these changes,the FY2005 Cook County funded ratio would have been 70.3% rather than 75.8% and the ForestPreserve ratio would have been 75.0% rather than 86.9%.

In FY2009 the Cook County and Forest Preserve plans made additional changes to assumptions

following an experience study for the period 2005 through 2008. The plans changed from 1983mortality tables to 1994 mortality tables, increased termination rates and revised retirement ratesto reflect fewer expected retirements and lower average age at retirement. These changes resultedin an increase of $810.8 million in unfunded liabilities for Cook County and an increase of $24.8million in unfunded liabilities for the Forest Preserve.49 Without these changes, the FY2009Cook County funded ratio would have been 67.5% rather than 63.2% and the Forest Preserveratio would have been 75.6% rather than 68.7%.50

In FY2007 the CTA reduced the discount rate for its retirement plan from 9.0% to 8.75%, and in2011 the discount rate was again reduced by 0.25% to 8.5%. The result of this shift in theassumed rate of return on the CTAs investments increased the actuarial liabilities for theretirement plan by approximately 1.9%, or $46.0 million.51

Employer and Employee Contributions

Changes in employer or employee contributions can have a significant effect on the funded statusof a defined benefit plan. Specifically, stable but consistently inadequate contributions are verydetrimental.

Employee contributions are typically fixed at a certain percentage of pay (around 9% for thefunds included in this reportsee page 46). Employer contributions may be tied to an actuarialestimate of what is needed or may be a fixed rate. As described on page 47, the employercontributions to the Teachers and CTA pension funds are actuarially-related, but the other eight

local funds in this report all have fixed contribution rates based on the employee contributionstwo years prior.

Temporary reductions in employer contributions, sometimes referred to as pensionholidays, can have a significant negative effect on the fiscal health of a pension fund. Forexample, Public Act 93-0654 allowed the Chicago Park District to reduce its employercontribution by $5 million in each of calendar years 2004 and 2005, although the District was notrequired to reduce its property tax levy equivalently. This created a 50% reduction in the

48County Employeesand Officers Annuity and Benefit Fund of Cook County,Actuarial Valuation as of

December 31, 2005, pp. 13-14, and Forest Preserve District Employees Annuity and Benefit Fund of Cook County,Actuarial Valuation as of December 31, 2005, pp. 13-14. The change was a correction to the actuarys computermodel. Information provided by Sandor Goldstein, March 20, 2009.49County Employees and Officers Annuity and Benefit Fund of Cook County,Actuarial Valuation as ofDecember 31, 2009, pp. 11-15, and Forest Preserve District Employees Annuity and Benefit Fund of Cook County,Actuarial Valuation as of December 31, 2009, pp. 11-15.50 In FY2010, the Municipal Fund updated its actuarial assumptions with regard to payroll growth, salary increases,retirement rates, turnover rates, and mortality rates that resulted in a $577 million increase in the actuarial accruedliability and unfunded actuarial accrued liability. Municipal Employees Annuity and Benefit Fund of Chicago,Actuarial Valuation Report for the Year Ending December 31, 2010, pp. 9-10.51 Retirement Plan for CTA Employees,Actuarial Valuation as of January 1, 2008, p. 4.

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employer contributions for the Park District fund in FY2005 and FY2006 and increased theunfunded liabilities by roughly $20 million.52

Chronic shortfalls in employer contributions are a very serious drag on the health of manypension funds. GASB Statements 25 and 27 require that public pension plans calculate an annualrequired contribution (ARC) that must be reported in the financial statements of the plan and the

government employer. The ARC is equal to the sum of (1) the employers normal cost ofretirement benefits earned by employees in the current year; and (2) the amount needed toamortize any existing unfunded accrued liability over a period of not more than 30 years.53Although GASB does not require funding at the level of the ARC, it does require that plansreport on how their actual contribution levels compare to the ARC.54 As described beginning onpage 46, the employer contributions to nine of the ten pension funds in this report were less thanhalf the ARC in FY2010. The state statutes governing those pension funds whose employercontributions are set as a multiple of the employee contribution made two years prior do notinclude a self-adjusting mechanism to change those multiples when they fail to meet the ARC.For example, the City of Chicago contribution multiple for its Police pension fund has notincreased since 1982, when it was raised from 1.97 to 2.00 times the employee contributionmade two years prior.55 In 1999 the Municipal Fund contribution multiple was reduced from 1.69to 1.25 and has not been raised again despite the fact that the actuarial value funded ratio hasfallen below 50%.56

In contrast to the Chicago-area public pension funds covered in this report, all downstatefirefighter funds, downstate police funds and the Illinois Municipal Retirement Fund (IMRF)require employer funding at a level consistent with the ARC. The property taxes levied by thesegovernments for pension purposes fluctuate according to the actuarial needs of the pension plans,not according to a fixed multiple of employee contributions. While funding at the ARC is fiscallyresponsible, it may require employer contributions that are more volatile and/or larger than asimple funding multiple. However, failure to fund at the ARC effectively pushes the costs oftodays government services ontotomorrows taxpayers. Employer funding of public pensionplans should be sufficient to keep the promises made to todays employees for their futureretirement in order to ensure intergenerational equity for taxpayers.

LOCAL PENSION FUND STATUS INDICATORS

The following section analyzes FY2010 data from ten local pension funds using the primaryindicators of pension fund health: funded ratios, unfunded liabilities and investment rates ofreturn.

52Park Employees Annuity and Benefit Fund of Chicago, Actuarial Valuation as of June 30, 2006, p. 12 and ParkEmployees Annuity and Benefit Fund of Chicago,Actuarial Valuation as of June 30, 2005, p. 12.53See Civic Federation, Pension Fund Actuarially Required Contributions (ARC): A Civic Federation Issue Brief,February 14, 2007, http://www.civicfed.org/articles/civicfed_241.pdf.54 GASB sets accounting standards and has no authority over funding levels.55 Effective beginning in 2015, employer contributions will be actuarially-determined. Policemens Annuity andBenefit Fund of Chicago, Comprehensive Annual Financial Report for the year ended December 31, 2010, pp.7-8.56 40 ILCS 5/8-173. The difference between the 1.69 multiple and 1.25 is equivalent to approximately $50 millioneach year.

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Funded Ratios

This report uses two measurements of the pensionplans funded ratios: the actuarial value ofassets measurement and the market value of assets measurement.

The actuarial value of assets measurement presents a ratio of assets to liabilities that accounts forassets by recognizing unexpected gains and losses over a period of three to five years (see

Appendix A for an explanation of actuarial value of assets). The market value of assetsmeasurement presents the ratio of assets to liabilities by recognizing investments only at currentmarket value. It is important to note that the major investment losses experienced by most fundsin FY2008 are not fully reflected in the actuarial value of assets. The market value of assetsfunded ratio represents the percentage of liabilities that could be covered by assets if those assetswere sold at their current market value.

Actuarial Value of Assets

The actuarial funded ratio of every fund declined in FY2010. All ten funds are now less than75% funded. The largest declines were in Chicagos Municipal Fund and Teachers Fund. Much

of the decline in the Municipal Fund can be attributed to changes in actuarial assumptions thatincreased the actuarial accrued liability and unfunded actuarial accrued liability by $577million.57The drop in the Teachers fund is mostly attributable to investment losses incurred inFY2008 and FY2009 and recognized in FY2010.58

The lowest actuarial value funded ratios for FY2010 are those of the Fire and Police pension fundsat 32.4% and 39.7%, respectively. The Commission to Strengthen Chicagos Pension Fundsprojected in April 2010 that the Fire and Police funds would run out of money in approximately tenyears barring any major changes to benefits or contributions.59 A similar projection had been madefor the CTA Fund prior to the passage of reform legislation (see page 8). An additional note ofconcern with respect to the Police Fund is that a large number of active employees are nearing

retirement age, which will result in lower employee contributions and more benefit payments.

60

The Laborers Fund had the highest actuarial value funded ratio at 73.8% in FY2010. TheLaborers Fund dipped below 100% funded for the first time in FY2004 and the employercontribution had previously been waived when the plan was over 100% funded.61

It is important to consider actuarial funded ratios over time. The following chart illustrates theten funds actuarial standings since FY2001. The actuarial value funded ratio for the aggregate of

57Municipal Employees Annuity and Benefit Fund of Chicago , Actuarial Valuation Report as of December 31,2010, pp. 9-10. See also note 49.58Public School Teachers Pension and Retirement Fund of Chicago,Actuarial Valuation as of June 30, 2010, pp.11-12.59 City of Chicago, Commission to Strengthen Chicagos Pension Funds, April 30, 2010, p. 22. Available athttp://www.cityofchicago.org/city/en/depts/obm/provdrs/perf_mang/news/2010/apr/commission_to_strengthenchicagospensionfundsreleasesreportonfisc.html.60Policemens Annuity and Benefit Fund of Chicago, Actuarial Valuation for the year ending December 31, 2009,pp. 3 and 8.61 Pursuant to Public Act 93-0654, the City of Chicago is not required to make employer contributions unless thefunded ratio excluding early retirement initiative liabilitiesdrops below 100%. The City was required to resumemaking contributions to the Laborers fund in FY2007 (see Laborers and Retirement Board Employees Annuityand Benefit Fund of Chicago, Actuarial Valuation Report for the year ending December 31, 2005, p. 6).

http://www.cityofchicago.org/city/en/depts/obm/provdrs/perf_mang/news/2010/apr/commission_to_strengthenchicagospensionfundsreleasesreportonfisc.htmlhttp://www.cityofchicago.org/city/en/depts/obm/provdrs/perf_mang/news/2010/apr/commission_to_strengthenchicagospensionfundsreleasesreportonfisc.htmlhttp://www.cityofchicago.org/city/en/depts/obm/provdrs/perf_mang/news/2010/apr/commission_to_strengthenchicagospensionfundsreleasesreportonfisc.htmlhttp://www.cityofchicago.org/city/en/depts/obm/provdrs/perf_mang/news/2010/apr/commission_to_strengthenchicagospensionfundsreleasesreportonfisc.htmlhttp://www.cityofchicago.org/city/en/depts/obm/provdrs/perf_mang/news/2010/apr/commission_to_strengthenchicagospensionfundsreleasesreportonfisc.html

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all ten funds assets and liabilities was 56.2% in FY2010, down from 61.3% in FY2009 and88.0% in FY2001.

Market Value of Assets

It is also useful to evaluate the pension plans market value funded ratios over time. Thefollowing table illustrates the fluctuations in the market value funded ratios since 2001. Marketvalue funded ratios are more volatile than the actuarial funded ratios due to the smoothing effectof actuarial value (see Glossary). However, market value funded ratios represent how muchmoney is actually available as of the valuation date to cover actuarial accrued liabilities.

Each funds FY2010 market value funded ratio is less than its FY2010 actuarial funded ratiobecause 2008-2009 investment losses have not yet been fully recognized in the actuarial assetvalues smoothed over four or five years. Even though all ten funds experienced positive returnsin FY2010, mixed funded ratio movement is indicative of pressures or changes other thaninvestment returns. The market value funded ratio for most funds increased in FY2009 over

FY2008 as investment returns rebounded during 2009. However, the Teachers and Park Districtmarket value funded ratios are significantly less than their actuarial values because those fundsare on a July 1 to June 30 fiscal year, and they sustained investment losses during their 2009fiscal year July 1, 2008 to June 30, 2009.

The market value funded ratios for the Fire and Police Funds were only 29.9% and 36.7%,respectively. The highest market value funded ratio was the Laborers Fund at 68.9%. Mostfunds were in the approximately 45% to 65% range. The market value funded ratio for the

32.4% 39.7% 49.8% 73.8% 56.5% 60.7% 65.2% 70.1% 67.1% 62.3%

0%

20%

40%

60%

80%

100%

120%

140%

Fire Police Municipal Laborers' MWRD CookCounty

ForestPreserve

CTA Teachers' ParkDistrict

Actuarial Value Funded Ratios: FY2001 - FY2010

2001 2002 2003 2004 2005 2006 2007 2008 2009 2010

2010Ratios:

100% = fully f unded

Note: Calendar Year Funds: Fire, Police, Municipal , Laborers', MWRD, Cook County, Forest Preserve, CTA; July 1 to June 30 Funds: Teachers', Park DistrictSource: Respective pension funds' annual financial reports, FY2001-FY2010.

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aggregate of all ten funds assets and liabilities was 50.3% in FY2010, up slightly from 49.8% inFY2009 and down from 81.5% in FY2001.

29.9% 36.7% 45.1% 68.9% 53.6% 57.6% 61.6% 65.9% 55.0% 49.5%

0%

20%

40%

60%

80%

100%

120%

140%

Fire Police Municipal Laborers' MWRD CookCounty

ForestPreserve

CTA Teachers' ParkDistrict

Market Value Funded Ratios: FY2001 - FY2010

2001 2002 2003 2004 2005 2006 2007 2008 2009 2010

2010Ratios:

100% = fully funded

Calendar Year Funds: Fire, Police, Municipal, Laborers', MWRD, Cook County, Forest Preserve, CTA; July 1 to June 30 Funds: Teachers', Park Di strictSource: Respective pension funds' annual financial reports, FY2001-FY2010.

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Unfunded Actuarial Accrued Liabilities

The difference between assets and accrued liabilities is known as the unfunded liability. Theunfunded actuarial accrued liability (UAAL) is calculated by subtracting the actuarial value of theassets from the actuarial accrued liability (AAL) of each fund.

One of the functions of this indicator is to measure a funds ability to bring assets in line withliabilities. Healthy funds are ones that are able to reduce their unfunded liabilities over timewhile substantial and sustained increases in liabilities are cause for concern.

The aggregate unfunded liability of the ten pension funds has increased rapidly in recent years,as shown in the following chart. The aggregate unfunded liability grew from $4.6 billion inFY2001 to $27.4 billion in FY2010, an increase of $22.8 billion, or 495.8%, over ten years. InFY2007 the aggregate UAAL fell by $1.7 billion due in part to strong investment returns, but itrose again by $10.3 billion over the following three years.

$4,597

$8,243

$11,361

$14,398

$16,486

$18,732

$17,092

$18,485

$22,937

$27,391

$-

$5,000

$10,000

$15,000

$20,000

$25,000

$30,000

2001 2002 2003 2004 2005 2006 2007 2008 2009 2010

Millions

Aggregate Unfunded Actuarial Accrued Liabilities of the Ten Pension Funds:FY2001 -FY2010

Source: Respective pension funds' annual financial reports, FY2001-FY2010.

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The following graph shows the five-year trend in UAAL for each fund. The largest FY2010unfunded liability is in the Municipal Fund at $6.0 billion, an increase of 90.0%, or $2.9 billion,over FY2006. The Police, Cook County and Teachers Funds each had over $5.0 billion inunfunded liabilities in FY2010.

The highest rate of increase in unfunded liabilities was in the Laborers Fund, which had $145.0

million in unfunded liabilities in FY2006 and $542.0 million in FY2010. This is an increase of273.5%.

The UAAL of the CTA Fund decreased between FY2006 and FY2010 primarily as a result of thetransfer of retiree healthcare obligations to a separate trust fund, $1.1 billion in bond proceedsdeposited from a pension obligation bond and increases in both employer and employeecontributions.

Unfunded Accrued Actuarial Liabilities as a Percentage of PayrollAnother indicator of funding progress is a funds UAAL expressed as a percentage of coveredpayroll. This measurement demonstrates the relative size of the unfunded liability by expressingit in terms of the current personnel expenditures.

An indication of a reasonable funding strategy is a gradual decrease in unfunded liabilities as apercentage of covered payroll over time. If the opposite is true and unfunded liabilities continueto increase as a percentage of covered payroll, then a new funding strategy and a reduction in the

$1,869

$4,119

$3,183

$145

$515

$2,442

$33

$3,166 $3,088

$173

$2,505

$5,656

$6,049

$542

$885

$5,160

$98

$814

$5,367

$314

$0

$1,000

$2,000

$3,000

$4,000

$5,000

$6,000

$7,000

Fire Police Municipal Laborers' MWRD CookCounty

ForestPreserve

CTA Teachers' ParkDistrict

Millions

Unfunded Actuarial Accrued Liabilities: 2006 vs. 2010

2006 2010

Source: Respective pension funds' annual financial reports, FY2006and FY2010.

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Unfunded Accrued Actuarial Liabilities Per Capita in Chicago

Calculating the unfunded liability per capita offers another sense of scale for unfunded liabilities.The following table shows that the UAAL per capita for the four City of Chicago pension fundswas $827 in FY2000. The total for all ten local pension funds was $1,189 per resident ofChicago. When one includes the five State-sponsored pension funds for which Chicago residentsalso pay taxes (including income taxes), the FY2000 unfunded liability per capita in Chicagorises to $2,443.

The highest per capita unfunded liability in FY2000 among the local funds was for the PoliceFund at $564 per resident of Chicago. The Laborers and Forest Preserve Funds were both over100% funded in FY2000 so they showed negative unfunded liabilities per capita. The downstateTeachers Retirement System, which Chicago taxpayers support in addition to the ChicagoTeachers Fund, had the highest unfunded liabilities per capita at $918.

Fund

FY2000 UnfundedAccrued Actuarial

Liability

2000

population

Unfundedliability per

capita Funded Ratio

Chicago Fire1 $ 833,853,513 2,896,016 288$ 59.4%

Chicago Police1 $ 1,632,563,097 2,896,016 564$ 71.1%

Chicago Municipal1 $ 367,203,474 2,896,016 127$ 94.5%

Chicago Laborers1 $ (440,057,229) 2,896,016 (152)$ 133.9%Subtotal Four City Funds $ 2,393,562,855 $ 827

MWRD1 $ 156,842,220 5,376,741 29$ 87.6%

Cook County1 $ 363,268,964 5,376,741 68$ 94.0%

Forest Preserve1 $ (6,272,752) 5,376,741 (1)$ 103.7%

CTA2 $ 530,761,000 3,700,000 143$ 77.5%

Chicago Teachers1 $ 328,168,774 2,896,016 113$ 96.7%

Chicago Park District1 $ 28,029,013 2,896,016 10$ 95.7%Subtotal Ten Local Funds $ 3,794,360,074 1,189$

Downstate Teachers (TRS)3 $ 11,404,991,000 12,419,213 918$ 68.2%

State University Employees (SURS)3 $ 1,615,100,000 12,419,213 130$ 88.2%

State Employees (SERS)3 $ 2,002,087,260 12,419,213 161$ 81.7%

Judges3 $ 448,219,698 12,419,213 36$ 48.6%

General Assembly3 $ 98,891,471 12,419,213 8$ 41.6%Subtotal Five State Funds $ 15,569,289,429 1,254$

Total All Local and State Funds $ 19,363,649,503 $ 2,443

Source: FY2000 financial statements of the pension funds.

Source for population: U.S. Census Bureau estimates, except CTA is CTA budget book estimate.

State and Local Public Pension Funds Unfunded Liabilities Per Capita FY2000

2 Supported by local sales taxes, real estate transfer tax, and fares.

3 Supported by state sales taxes, income taxes, and other general revenues.

Total Unfunded Liability Per Capita in the City of Chicago

Note: Includes all major public pension funds for which Chicago residents pay taxes.1 Supported by local property taxes (indirectly for Chicago Teachers' Fund).

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The following graph illustrates the $23.6billion increase in the ten local funds unfundedliabilities between FY2000 and FY2010, alongside the $7,804 increase in unfunded liabilities percapita.

Investment Rate of Return62

In FY2010 each of the ten pension funds had a positive rate of return, in contrast with thedouble-digit negative returns experienced in FY2009 for the Teachers and Park District Funds.

The FY2010 average rate of return for those funds with a January 1 to December 31 fiscal yearwas 13.7%, falling from 18.6% in FY2009. The average rate of return for funds using a July 1 toJune 30 fiscal year was 12.7%, rising from -20.2% in FY2009.

The FY2010 investment returns resulted in a gain of $3.8 billion for the ten funds combined,

compared to a $0.7 billion gain in FY2009 and a loss of $7.1 billion in FY2008.

63

A comparison of

62 The Civic Federation calculates investment rate of return using the following formula for all funds: Current YearRate of Return = Current Year Gross Investment Income/ (0.5*(Previous Year Market Value of Assets + CurrentYear Market Value of AssetsCurrent Year Gross Investment Income)). This is not necessarily the formula used byall funds actuaries and investment managers, thus investment rates of return reported here may differ from thosereported in a funds actuarial statements. However, it is a standard actuarial formula. Gross investment incomeincludes income from securities lending activities, net of borrower rebates. It does not subtract out relatedinvestment and securities lending fees, which are treated as expenses.

$3,794,360,074

$27,391,157,429

$1,189

$8,993

$-

$1,000

$2,000

$3,000

$4,000

$5,000

$6,000

$7,000

$8,000

$9,000

$10,000

$-

$5,000,000,000

$10,000,000,000

$15,000,000,000

$20,000,000,000

$25,000,000,000

$30,000,000,000

FY2000 FY2010

Unfunded Liability Per Capita of Local Public Pension Funds forResidents of the City of Chicago: FY2000 vs. FY2010

Unfunded Liability Unfunded Liability Per Capita

Source: Respective pension funds' annual financial reports, FY2000-FY2010.

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the investment rates of return for FY2009 and FY2010 in the following figure shows that for theeight funds using a calendar year fiscal year, investment returns were between 11.9% and 15.7%in FY2010. These returns are calculated gross of investment fees and are not time-weighted sothey may differ from the returns reported by the funds.64 As shown in the graph below, returnsfor the Fire and Laborers Funds were the highest and the Police Fund the lowest in FY2010.

The two funds that use a July 1 to June 30 fiscal year, the Teachers and Park District Funds,experienced gains of 14.1% and 11.4%, respectively.65 Differences in investment returns mayreflect the investment allocation choices of the funds or the performance of investmentmanagers, or both.

63 Investment returns are gross investment income including income from securities lending activities net ofborrower rebates. Gross investment income does not subtract out related investment and bank fees, which are

treated as expenses in this report.64 The Civic Federation calculates investment rate of return using the following formula for all funds: Current YearRate of Return = Current Year Gross Investment Income/ (0.5*(Previous Year Market Value of Assets + CurrentYear Market Value of AssetsCurrent Year Gross Investment Income)). This is not necessarily the formula used byall funds actuaries and investment managers, thus investment rates of return reported here may differ from thosereported in a funds actuarial statements. However, it is a standard actuarial formula. Gross investment incomeincludes income from securities lending activities, net of borrower rebates. It does not subtract out relatedinvestment and securities lending fees, which are treated as expenses.65 On May 31, 2012, the Illinois General Assembly passed Senate Bill 3629, which, if signed into law, would amendthe Park District Funds fiscal year to be concurrent with the calendar year and the sponsoring governments fiscalyear, beginning January 1, 2013.

24.4%

20.1%17.7%

21.6%23.2%

17.2% 17.6%

7.1%

-21.7%

-18.7%

15.6%

11.9%13.4%

15.7% 14.9%

12.4% 13.0% 12.5%14.1%

11.4%

-30.0%

-20.0%

-10.0%

0.0%

10.0%

20.0%

30.0%

Fire Police Municipal Laborers' MWRD CookCounty

ForestPreserve

CTA Teachers' ParkDistrict

Investment Rates of Return: FY2009 - FY2010

2009 2010

Calenda r Year Funds: Fire, Police, Municipal, Laborers, MWRD, Cook County, Forest Preserve, CTA; July 1 to June 30 Funds: Teachers', Park DistrictSee text footnotes for explanation of how rate of return is calcula ted.Source: Respective pension funds' annual financial reports, FY2009 and FY2010.

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Investment rates of return should be considered from a historical perspective. During the latterhalf of the 1990s, strong financial markets significantly increased local pension funds assets.However, that positive trend reversed and by the close of FY2002 every fund had a negative rateof return, ranging from -2.8% to -12.9%. In FY2003, the rates of return for all funds turnedpositive again, with an average rate of 16.9%. The average rate of return fell dramatically inFY2008 following the financial market crisis and rebounded in FY2009 to an average of 10.8%

for all ten funds. The average rate of return rose again in FY2010 to 13.5%.

66

66The average rate of return is the mean of all ten funds rates of return.

-2.3%

-7.6%

16.9%

11.5%

7.5%

11.3%9.9%

-21.1%

10.8%

13.5%

-25.0%

-20.0%

-15.0%

-10.0%

-5.0%

0.0%

5.0%

10.0%

15.0%

20.0%

2001 2002 2003 2004 2005 2006 2007 2008 2009 2010

Local Pension Funds' Average Investment Rate of Return:FY2001 - FY2010

Note: The average rate of return is the m ean of all ten funds' rates of return.Source: Respective pension funds' annual f inancial statem ents, FY2009 and FY2010.

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The following figure also presents the average investment rate of return, but splits the ten fundsinto two groups: those with calendar year fiscal years and those with July 1 to June 30 fiscalyears. Differences in the trend lines reflect the timing of market trends. For example, calendaryear funds saw average returns of 20.1% in FY2003 and July 1 t